Hot Wallet Vs Cold Wallet - How are they Different?

Nowadays everyone is looking for healthier and worthy means to invest their money. People nowadays choose savings more than investment. And when it comes to investment, cryptocurrencies and stock market are the best examples to choose. 

 

Especially when it comes to crypto, here you can find both half pants and full pant investors. The investing process here is quite simple if you understand the basic terminologies. 

 

There are several terms which often confuse the investors, two such terms are hot wallet and cold wallet. Though, the meaning of a crypto wallet is quite simple, just like traditional wallets that are used to keep your cash, crypto wallets are used to keep cryptocurrencies. 

 

In this blog we will be discussing the difference between a hot wallet and a cold wallet.

 

Also Read | Future of Cryptocurrency

 

 

What is the meaning of Hot Wallet?

 

In cryptocurrency, a hot wallet is a wallet which is always connected to the internet. As a hot wallet is always visible in the network, it is used to send, receive and manage tokens. It also helps in transferring cryptocurrencies. 

 

Hot wallet in cryptocurrencies is linked with public and private keys that act as security measures and facilitate secure transactions. Always visible to the internet, a hot wallet is more vulnerable to risks than a cold wallet. Hot wallet in simple words is an interface for accessing and storing cryptocurrency. 

 

The main role of a hot wallet in a crypto network is to facilitate changes to the transaction record kept on the decentralized blockchain ledger.

 

Working of a hot wallet

 

Wallets are used in cryptocurrencies to hold coins and facilitate transactions. If you want to mine or buy a cryptocurrency, you have to set a wallet first. Your private keys and cryptocurrencies are stored in this wallet. 

 

You can access these keys stored in your wallets when ownership is transferred to you by the ecosystem. When you own a cryptocurrency, you are assigned a private key. Both private and public keys help you in identifying your wallet. In fact, public keys are quite similar to your account username. 

 

These keys help you to receive the tokens without revealing your identity to the network. Acting as your own personal identification number, they help you to access the wallet, manage the wallet, check balances and initiate the transactions. Without wallets, the value of keys is equal to none.

 

Also Read | Blockchain Mining

 

Examples of hot wallets

 

There are several kinds of hot wallets available on the network. Many of them are free to download. While others are paid and are specially designed to be used with a particular mobile or web application. Also there exists particular wallets that only work with particular cryptocurrency or network. 

 

The major examples of hot wallets are MetaMask, Coinbase Wallet, and Edge Wallet. Let us study a brief detail of these three.

 

MetaMask

 

MetaMask works particularly with the Ethereum ecosystem. 

 

Coinbase Wallet

 

Coinbase wallet is especially designed to perform cryptocurrency exchange.

 

Edge Wallet

 

Edge wallet can perform all kinds of transactions to any network.

 

Before downloading a wallet, it is essential to choose your services. As there are plenty of free wallets available, you better go through little research, study their terms, conditions and commitments. Check the list of your priorities before creating a wallet.

 

 

What is the meaning of Cold Wallet?

 

Cold wallets are sometimes called cold storage. It is a kind of offline wallet used to store cryptocurrencies, especially bitcoins. The main property of cod wallet is that it is not connected to the network. Its inability to access the internet makes it safe from risks such as unauthorized access and cyber hacks. 

 

Though, the maximum of existing wallets is digital in nature i.e., hot wallets. But since a few while, cold wallets have come into existence as an offline method to store cryptocurrency tokens. Cryptocurrency investors aim to make their transactions safer and more efficient by employing cold wallets.

 

Working of Cold Wallet

 

When we talk about brick-and-mortar banks, they try their best to refund the stolen money of their customers. But that’s not something expected with digital money i.e., cryptocurrency. If your cryptocurrency wallet has been compromised or your crypto coins or tokens have been stolen, you just can’t recover it. 

 

The obvious reason for it is that the crypto market is not centralized or backed up by the government. Also, hot wallets which are used as a means to store crypto coins and tokens are always subjected to the market risks due to their presence on the network and evergreen connection with the internet. There comes the need of cold wallets, a safe and secure medium of storage for bitcoins and altcoins.

 

A bitcoin wallet is linked with public and private keys as explained above. The private key which is basically the combination of alphanumeric characters is unique for every user. For sending bitcoin or other crypto coins it is important to have access to these keys. 

 

As explained earlier the public key acts as a username and helps the network to decide the destination of coins while transferring them. The buyer in the blockchain and the seller has to share these keys to validate the transactions. 

 

Thus, it is essential to keep the private keys secure, because if stolen your crypto coins can be unlocked and accessed without your authorization. Here, cold wallets come to rescue. Cold wallet resolves the safety issue by signing the transaction with the private keys in an offline atmosphere. 

 

Offline wallet can be kept in devices such as USB, CDs or offline computers, where it is digitally signed before submission. As in this method the private key does not come into contact with an online server, the hackers can never access it. Thus, cold wallets add more security to the transaction than hot wallets. 

 

Examples of Cold Wallet

 

The major examples of cold wallets are paper wallet, USB wallet and other offline computer storage facilities where private keys can be kept for example CDs.

 

The leading cold wallets of last year 2021 are Leader Nano X, Trezor Model T, CoolWallet Pro, KeepKey, Ellipal Titan, Safepal S1, SecuX V20 and Keystone Pro.

 

Also Read | Four Types of blockchain network

 

Difference between Hot Wallets and Cold Wallets

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Key differences between Hot Wallets and Cold Wallets

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Now let us conclude the blog, by revising the major differences between the hot wallets and cold wallets. The list of differences between both these wallets is as follow:

 

1. Hot wallets are easy to use as they are always available online. While cold wallets are offline resources and involve a complex process.

2. Hot wallet is always vulnerable and not safe to keep a large number of cryptocurrencies, while cold storage is a good option to keep your coins and tokens safe.

3. Stealing from a cold wallet requires physical procession, while stealing from a hot wallet requires computer and software knowledge.

4. Cold wallets require physical space while hot wallets are available on e-Space.

5. Cold wallets are more expensive than hot wallets.

6. Hot wallets are secured by keys while cold wallets are secured by PINs and passwords.

 

Also Read | Hard Forks vs Soft Forks

 

In short, cryptocurrency is the combination of hot wallets and cold wallets. And for users to maintain a healthy trading they should strike the balance between hot wallets and cold wallets. A simple suggestion, if you have so much money in your wallet it is always a better option to keep it in a cold wallet. 

 

Cold wallet not only prevents your money from risk but also keeps it safe at the same time. You should keep a limited amount of money in your hot wallet and the rest of it in cold wallet. In case, your money in a hot wallet goes below the fixed amount, you can transfer more money from your cold wallet. Happy investing!